market news 14 September 2020

ECB mildly upgrades growth forecasts although inflation still expected to be extremely low; euro area industrial production data disappoint; China trade volumes rebound more than expected

• The ECB announced no changes to current policy at their press conference this week, although investors took comfort in Lagarde’s response to questions that “it is very likely that the full envelope of PEPP will be used”. This gives room for the ECB to pick up the pace of asset purchases going into the end of the year (€1.35bn total package). There was discussion about the continued strength of the euro, although actions that the central bank can take are limited given the negative implication for the banking system of going further into negative territory on rates. The ECB September forecast revised 2020 growth upwards to -8.0% (previous: -8.7%), but inflation is forecast to remain very low this year at +0.3%
• French industrial production growth slowed more than expected in July, +3.8% over the month (consensus: +5.0%, June: +13.0%). This moved the 12 month decline to -7.1%, still well below pre-COVID levels but much improved from the -34.0% yoy decline recorded just a few months ago. Manufacturing (ex-energy and construction) was up 4.5%, energy output was flat (-0.4%) and construction was up 5% over the month
• German industrial production followed a similar trend, as growth slowed to 1.2% in the month of July (consensus: 4.7%, June: +9.3%). Investment goods production was +2.1% mom (June: +18.2%), consumer goods +1.8% (June: +7.4%) and intermediate goods +4.0% (June: 5.2%). The construction sector saw a -4.3% setback, taking growth to just +0.5% year on year, and the energy sector also contracted in July -0.6%.
• China’s August trade report showed continued strengthening of the export sector, +1.3% over the month (July: +7.2%). Exports to the US rose 3.2% over the month, taking the total trade surplus with the US to $187.6bn in the first 8 months of the year ($195.3bn for same period last year). The underlying composition of the report showed slowing growth in low-end consumer goods and mechanical/electrical products, whilst high tech product exports contracted moderately over the month (-1.1%, +11.9% yoy). China’s overall trade balance has improved significantly over the last 12 months, as exports have grown +9.5% and imports have declined -2.1%

Risk-off tone persists in markets, led by US tech weakness

• The Nasdaq fell another 4% in a holiday-shortened week, dragging global equities lower, although euro area stocks actually rose slightly, benefiting in part from the loss of upward momentum of EUR. UK equities also received a tailwind from the notable underperformance of GBP as Brexit negotiations faltered.
• Government bond yields fell due to equity weakness, led unsurprisingly by UK gilts. Gold was stable around $1,940/oz whilst Brent crude fell below $40/bbl for the first time since June